How to Tear Down Barriers to In-Plan Annuities

According to a recent study by the Plan Sponsor Council of America (PSCA), only 5% of plans offer guaranteed-retirement-income products in-plan. Sponsors cite several reasons for why they are cautious about adding these products to their plans, ranging from fiduciary risk to participant-communication challenges.

Derek Dorn, head of public policy at TIAA, argues that certain policy changes could make it easier for plan sponsors and their participants to embrace lifetime-income products such as annuities. In fact, he tells PLANSPONSOR, a safe harbor provision for offering the options already exists; however, it can use some polishing.

The Department of Labor (DOL) has provided some guidance on selecting in-plan options, but Thea new white paper by TIAA notes that many sponsors are particularly confused about how to evaluate the financial strength of an insurance provider. Such entities are regulated differently across state lines, and “there is no centralized marketplace for insurance products that provides standardized comparative information,” the white paper states. However, TIAA also notes that the Retirement Enhancement and Savings Act of 2016 (RESA) can help here.

This legislation makes readily available “standardized information, generated through the process of state examination and licensing, about the financial strength of an insurer.” TIAA says RESA can amend the Employee Retirement Income Security Act (ERISA) to allow fiduciaries to qualify for the safe harbor by indicating that the insurer has operated under a valid certificate of authority from its home state for the current and preceding seven years, has filed audited financial statements and maintains the reserves required by state law; will undergo a financial examination at least every five years in its home state; and will notify the fiduciary of any change in circumstances.

But in the event that a plan sponsor needs to replace or remove an annuity option, the portability process can be improved as well. TIAA notes that if such an action can be treated as a distributable event, “any participant invested in the product would be eligible to convert the annuity contract to an individual certificate or roll over the entire amount invested in the contract to an IRA [individual retirement account] that includes the insurer’s equivalent (or near-equivalent) lifetime-income product. An approach along these lines is reflected in RESA.”

TIAA argues that sponsors could also find fiduciary protection if in-plan annuities could be more easily incorporated into qualified default investment alternatives (QDIA).

When it comes to annuities, participants seem to be facing an education gap. According to a recent TIAA survey, the majority of participants are willing to invest a portion of their savings in a product that would guarantee a monthly payment such as an annuity. However, only one-third were familiar with annuities.

“Annuities can differ in their investment structure,” says Dorn. “Some annuities have different features and guarantees.”

Education on these products can be greatly improved, but so can education on what they are not. Dorn says that, unlike retail annuities, in-plan annuities are typically sold on a group basis and not on commission. He says this often translates to lower fees. Employees can also contribute to in-plan annuities over time to secure better rates of return.

TIAA notes that participants can also learn more about annuities if presented with an annual statement indicating a lifetime income projection, which informs them of how their current investments can translate into monthly payments. Such a requirement is described in the Lifetime Income Disclosure Act, which has been introduced into the House and Senate.

But, like any investment or insurance product, annuities are not for everyone.

“There is no one-size-fits-all solution,” Dorn says. “Whether an annuity makes sense—and the kind of annuity that makes sense—is going to depend on an individual’s financial profile. What we think is the benefit of saving in an annuity contract during [someone’s] working years is that, when [he] reaches retirement, [he] can determine whether to take a stream of income. [People] can look at their holistic picture, talk to an adviser and decide whether they should take a portion of it, all of it or none of it, and instead take a guaranteed paycheck for life.”

TIAA’s “Closing the Guarantee Gap: How policymakers can restore the role of lifetime income in workplace retirement plans” white paper can be found at tiaa.org.